The debt markets are cooler and the year’s biggest recapitalisation could become one of the after-market’s heaviest stones.
Institutional loan investors are expecting the senior and second lien tranches that financed Debenhams’ £2.05bn dividend recapitalisation to break well below par.
A syndicate source confirmed that the £560m term loan B and £560m term loan C would break later this week. The £300m second lien facility might be delayed, however, because a plan to repackage £75m to £125m in note form is still under discussion.
One fund manager, who had been allocated the full amount, suggested the senior debt would break around 97. Another manager in the deal said the second lien could eventually break below 95, perhaps as low as 92.
While private equity firms do not generally like to see their paper below par, CVC, Merrill Lynch Private Equity and Texas Pacific Group have already had mileage out of the investment. The deal paid them a £800m dividend, taking the full amount extracted from the company to £1bn. Furthermore, Debenhams is a potential IPO candidate in 12 to 18 months, a member of the syndicate said.
A fall in the secondary market would be more problematic for the underwriters. “I think the sponsors will be happy that the deal got done. If they tried to launch it now, they would not get it through the market,” a CDO manager said.
Whatever the pipeline indications, the underwriters still have to co-ordinate the sell-down. Investors recalled that heavy selling occurred when some sub-underwriters looked to reduce exposure quickly to Amadeus. The B/Cs have gained back 50bp to 99.5 this week, however.
Citigroup, CSFB, Merrill Lynch and Morgan Stanley underwrote Debenhams on an equal basis. They then had to flex fees from 135bp to 150bp to 170bp before Bank of Scotland, Barclays, Bayern LB, Caja Madrid, HVB, Lloyds and RBS joined as sub-underwriters.
Market sources claim that the underwriters are long on both the senior tranches and the second lien, with some sub-underwriters looking to sell out of the name more quickly than the top four banks would like.
“We know that there are some subs looking to get out on the edge of fees at 98. The arrangers don’t want them to sell, hence the delays,” an institutional investor said.